Strong currents that keep interest rates down

Central banks must move rates in an equilibrating direction — which they cannot choose

Why are interest rates so low? The best answer is that the advanced countries are still in a “managed depression”. This malady is deep. It will not end soon.

One can identify three different respects in which interest rates on “safe” securities in the principal high-income monetary areas (the US, the eurozone, Japan and the UK) are exceptionally low. First, the short-term intervention rates of central banks are 0.5 per cent or lower. Second, yields on conventional long-term government bonds are extremely low: the German 30-year bond yields 0.7 per cent, the Japanese close to 1.5 per cent, the UK 2.4 per cent and the US 2.6 per cent. Finally, long-term real interest rates are minimal: UK index-linked 10-year gilts yield minus 0.7 per cent; US equivalents yield more, but still only plus 0.4 per cent. If you had told people a decade ago that this would be today’s reality, most would have concluded that you were mad. The only way for you to be right would be if demand, output and inflation were to be deeply depressed — and expected to remain so. Indeed, the fact that vigorous programmes of monetary stimulus have produced such meagre increases in output and inflation indicates just how weak economies now are.Yet today we hear a different explanation for why interest rates are so low: it is the fault of monetary policy — and especially of quantitative easing, the purchase of long-term assets by central banks. Such “money printing” is deemed especially irresponsible.

As Ben Broadbent, deputy governor of the Bank of England, has argued, this critique makes little sense. If monetary policy had been irresponsibly loose for at least six years — let alone, as some have argued, since the early 2000s — one would surely have seen inflationary overheating, or at least rising inflation expectations. Moreover, central banks cannot set long-term rates wherever they wish.

Empirical analysis of the impact of quantitative easing suggests it might have lowered bond yields by as much as a percentage point. But note that yields remained extremely low even well after QE ended, first in the UK and now in the US.

The price level is the economic variable that monetary policy influences most strongly. Central bankers cannot determine the level of real variables — such as output, employment, or even real interest rates (which measure the return on an asset after adjusting for inflation). This is especially true over the long run. Yet the slide in real interest rates is longstanding. As measured by index-linked gilts, they fell from about 4 per cent before 1997, to about 2 per cent between 1999 (after the Asian financial crisis) and 2007, and then towards zero (in the aftermath of the western financial crisis).

There is a more convincing story about why interest rates are so low. It is that the equilibrium real interest rate — crudely, the interest rate at which demand matches potential supply in the economy as a whole — has fallen, and that central bankers have responded by cutting the nominal rates they control. Lawrence Summers, former US Treasury secretary, has labelled the forces “secular stagnation” — by which is meant a tendency towards chronically deficient demand.

The most plausible explanation lies in a glut of savings and a dearth of good investment projects. These were accompanied by a pre-crisis rise in global current account imbalances and a post-crisis overhang of financial stresses and bad debt. The explosions in private credit seen before the crisis were how central banks sustained demand in a demand-deficient world. Without them, we would have seen something similar to today’s malaise sooner.

Since the crisis, central banks have not chosen how to act — their hands have been forced. Events in the eurozone provide a powerful example. In early 2011, the European Central Bank raised its intervention rate from 1 to 1.5 per cent. This was wildly inappropriate, and in the end the ECB had to cut rates again and embark on QE. If central banks are to be a stabilising force, they have to move interest rates in an equilibrating direction — and that direction is not something they can choose.Rising risk aversion might be another reason why real interest rates on safe securities have fallen. The idea is that the crises increased the appeal of the safest and most liquid assets. This is part of the explanation for ultra-low yields on German Bunds. But it does not seem to be the dominant explanation over the longer run. The gap between the interest rate on treasuries and US corporate bonds has not been consistently wider since the crisis, for example. We should view central banks not as masters of the world economy, but as apes on a treadmill. They are able to balance demand with potential supply in high-income countries only by adopting ultra-easy policies that have destabilising consequences down the line.

When will we see an enduring rise in real and nominal interest rates? That would require a marked strengthening of investment, a marked fall in savings and a marked decline in risk aversion — all unlikely in the near future. China is slowing, which is likely to depress interest rates further. Many emerging economies are also weakening. The US recovery might not withstand significantly higher rates, particularly given the dollar’s current strength. Debt also remains high in many economies.

Ultra-low interest rates are not a plot by central bankers. They are a consequence of contractionary forces in the world economy. While upward moves in rates seem ultimately inevitable from current levels, it is likely that historically low rates will be with us for quite a while. Those who bet on jumps in inflation and a bond-market rout will continue to be disappointed. The depression has been contained. But it is a depression, all the same.

As most of you know by now, I am bearish on gold from an intermediate term perspective on account of the fact that I do believe that the Fed is eventually going to have to raise rates and try to somehow normalize monetary policy/interest rates. Perhaps I am wrong about that but I find it hard to believe that we can expect near zero interest rates into perpetuity. My own view is that the Fed can only do much to help the economy with monetary policy. What it cannot do however is to set fiscal policy or to deal with the heavy regulatory burden of an overreaching federal government. That will require a change in the party which controls the White House but that is unfortunately a long way off at this point. I maintain that had we a business friendly administration (think Obamacare and the burden that has produced on business for example, not to mention a runamok EPA), coupled with near zero interest rates and more fiscally sound budgets (controlled spending) that the economy would be in much better shape than it currently is. That being said, we have to work with what we have before us, not what we might wish for. For now, we have a Fed that has managed to inject enough uncertainty in regards to interest rates that it has taken some of the selling pressure off of gold for the time being.

In looking over the chart one can see that the weekly chart pattern shows an upside reversal pattern has formed. We had a low formed that was below the previous week's low and a high (plus a close) that was above the previous week's high. Thus, from a technical analysis perspective, it would not be a surprise to see some further upside in the market. For this market to provide anything further in the way of potential serious upside, it would need to clear resistance near $1220-$1225. Were that to occur, you would have the potential to make a run at heavier resistance near $1250. I would be very surprised if gold were able to clear that and would expect heavy selling to occur if it did rise to near those levels. I should note that the price remains well within TWO downtrending price channels and the particular indicator I am using on this time frame remains in a decidedly bearish posture. All of this leads me to view this bounce as nothing more than the latest upside retracement in an ongoing bearish market. We'll have to wait and see how much further the current shortcovering will take it before it runs out of steam.

Another view of the same chart using two familiar indicators shows the ADX/DMI also in a bearish posture with -DMI remaining above +DMI (Bears in control). Also, the RSI remains capped below 60 and has bounced off of the oversold level near 30. Nothing particularly bullish here as well. From where I sit at this time it looks to me like what the Fed managed to do was to therefore spook enough speculative shorts into covering that an upward leg is in the process of unfolding while some of these bears move to the sidelines.

If you look at the recent COT report, you can see that the number of total speculator short positions was rather high( remember - this report only covers through Tuesday and therefore does not show us how many of these shorts ran for the exits on Wednesday, the day that the FOMC statement was released). Look at the line within the circled ellipses and you can have some comparison to the recent peak in total spec short positions. We will have to see how many of these decide to cover and move out while waiting to re-enter on the sell side once more. The short term therefore is friendly but intermediate term remains bearish.

As noted yesterday, the biggest factor that I see now that stands as a huge hurdle for the bulls is the fact that once more, just like it did at this time last year, the gold ETF, GLD, is bleeding gold. The latest report from that shows a drop of almost 5 1/2 tons of gold on Friday and about 6.3 tons from the previous week. While overall reported tonnage is some 35 tons greater than at the start of the year, almost 27 tons has been shed since its peak reported holdings in February.

The gold perma-bulls can talk all they want to about Chinese and Indian demand but as stated many times here in the past, demand from those two countries can never drive the price of gold sharply higher. What it does is to put a floor in the market. To take the price higher requires Western-based speculative demand. GLD is illustrative of such demand. If it is falling, it is not friendly and no amount of spin can say otherwise. Shifting a bit over to the currency realm. Take a look at the most recent Euro COT chart just prior to the FOMC statement.

What I found rather remarkable is the big surge in the net long position of the "other large reportables" category. Large private traders, non-registered CTA's and CPO's, floor locals, etc. make up this group. They piled on a huge number of longs ahead of the FOMC statement. Note - I actually had to double check and make sure I was not making a mistake with the number when I saw it! Talk about a risky bet! In this case, they hit the jackpot but I would stress to the readers out there - this is not recommended strategy as the results can be disastrous for any trader who guesses wrong. Rolling the dice as this group did ahead of a major economic event can make you a hero or terminate your career and make you a zero. If you wish to gamble, head over to Vegas or Reno or Atlantic City. If you wish to trade, don't be stupid and bet the farm on something that has as much chance of going your way as a coin toss.

As you can also see, the hedge funds guessed wrong as well. A lot of longs in that category (there were not many in the first place) decided to get out ahead of the report as this camp was expecting a hawkish FOMC statement. Some in this category actually ADDED to existing shorts as well ahead of the statement. WHOOPS! They are now feeling a rather large amount of pain. Again, this is the reason one moves to the sidelines ahead of these major events or reports or at the very least reduces their position size. You just never know what you are going to get. Why risk it? This business is hard enough in the first place let alone exposing yourself to the potential for further harm by getting aggressive ahead of an event such as the FOMC statement. Next month, if you are trading currencies, lighten up ahead of that event!

Lastly, here is the old form COT chart for the US Dollar Index. As you can see, there were quite a bit of speculators on the long side of the Dollar as of this past Tuesday. This chart will bleed out some of these longs over the immediate future. We'll keep an eye on the chart and the price action to see when the price has stabilized and things calm down some.

IN THE world of economics, one policymaker towers above all others. The head of America’s central bank, Janet Yellen, presides over a $17 trillion economy. The empire of her nearest competitor, Mario Draghi, amounts to a relatively puny $10 trillion. On top of this, the dollar’s global role means Ms Yellen has a huge impact abroad, influencing more than $9 trillion in borrowing in dollars by non-financial companies outside America—more than enough to buy all the firms listed on the stock exchanges of Shanghai and Tokyo (see chart 1). As the dollar strengthens both in response to healthier growth in America and in the expectation that the Federal Reserve is getting ready to raise rates, this burden is becoming harder to bear.Dollar borrowing is everywhere, but the biggest growth has been in emerging markets. Between 2009 and 2014 the dollar-denominated debts of the developing world, in the form of both bank loans and bonds, more than doubled, from around $2 trillion to some $4.5 trillion, according to the Bank for International Settlements (BIS). Places like Brazil, South Africa and Turkey, whose exports fall far short of imports, finance their current-account gaps by building up debts to foreigners.Even countries without trade gaps have been borrowing heavily. With interest rates on American assets so meagre—a five-year Treasury bond pays just 1.5%—those with dollars to invest have sought out more rewarding opportunities. Firms based in emerging markets seemed to fit the bill. Some are big names: state-owned energy giants like Russia’s Gazprom and Brazil’s Petrobras have been issuing dollar bonds via subsidiaries based in Luxembourg and the Cayman Islands. Others are smaller. Recent months have seen Lodha group, an Indian property developer, Eskom, a South African power generator, and Yasar, a Turkish firm that makes TV dinners, sell dollar-denominated bonds. By borrowing dollars at several percentage points below the prevailing interest rate in their domestic currency, CEOs have pepped up profits in the short term.But finance rarely offers a free lunch. The worry is that tumbling energy prices mean firms like Gazprom and Petrobras now have much lower dollar income than expected when they took on debts. Others, such as Lodha, Eskom and Yasar, have few dollar earnings. Taking on debt just before a shift in exchange rates can be painful. In 2010 a Turkish firm borrowing $10m via a ten-year bond with a 5% coupon could expect to pay 22.5m lira ($15m) over the life of the bond. But the lira is down 43% against the dollar since then (see chart 2); the payments are now over 39m lira.

Where foreign debts and earnings line up there is little reason to worry. Asian firms’ foreign-currency debts tripled from $700 billion to $2.1 trillion between 2008 and 2014, going from 7.9% of regional GDP to 12.3%, according to economists at Morgan Stanley, a bank. To see whether the surge was bearable, the economists looked at the accounts of 762 firms across Asia. The findings were reassuring: on average 22% of their debt is dollar-denominated, but so are 21% of earnings. Although Asian firms are a big part of the emerging-markets’ borrowing binge, on the whole they seem well placed to cope with a rising dollar.Yet there are still two reasons to worry. First, the outlook for China is a puzzle. The country holds $1.2 trillion in Treasury bills, many of which are sitting in its sovereign-wealth fund. When the dollar rises, the fund gets richer. But even in a dollar-rich country, there can be pockets of pain. China’s firms have built up a nasty currency mismatch. Almost 25% of corporate debt is dollar-denominated, but only 8.5% of corporate earnings are. Worse, this debt is concentrated, according to Morgan Stanley, with 5% of firms holding 50% of it.Chinese property developers are the most obviously vulnerable. Companies like Evergrande, China Vanke and Wanda build and sell offices and houses, so most of their earnings are in yuan. Banned from borrowing directly from banks, they have been active issuers of dollar bonds. They have also borrowed from trust companies, according to Fitch, a rating agency. The trusts are themselves highly leveraged and have borrowed dollars via subsidiaries in Hong Kong. This arrangement will amplify the economic pain if property prices in China continue to decline, as they have been doing for several months.The second problem is that whole economies, rather than just the corporate sector, look short of dollars. In Brazil and Russia, for instance, bail-outs of firms lacking greenbacks are blurring the lines between the state, banks and big companies. The general scramble for dollars has contributed to the plunge of the real and the rouble. Others could follow this path. Turkey’s dollar borrowing has grown rapidly since 2009: in addition to the debts Turkish firms have taken on, the state’s external debt has grown to almost 50% of GDP, far above the average for middle-income countries (23%). South Africa looks worrying too: its current-account deficit is the widest of any big emerging market, and the government’s external debt is 40% of GDP.A wave of defaults would be unlikely to cause problems as widespread as the subprime crisis of 2008. Most bonds are owned by deep-pocketed institutional investors such as pension funds and insurers. The banks that have made loans face far tougher regulation than they did eight years ago and are generally far better capitalised. An emerging-market rout would not cause another Lehman moment. But it would mean big job losses at stricken firms. As investors reprice risk it would probably also lead to a sudden tightening of credit. In countries like South Africa or Turkey, where growth is evaporating fast, that could still be very painful.

LONDON – The US dollar is hitting new 12-year highs almost daily, while the euro seems to be plunging inexorably to below dollar parity. Currency movements are often described as the most unpredictable of all financial variables; but recent events in foreign-exchange markets seem, for once, to have a fairly obvious explanation – one that almost all economists and policymakers accept and endorse.

French President François Hollande, for one, has ecstatically welcomed the plunging euro: “It makes things nice and clear: one euro equals a dollar," he told an audience of industrialists. But it is when things seem “nice and clear" that investors should question conventional wisdom. A strong dollar and a weak euro is certainly the most popular bet of 2015. So is there a chance that the exchange-rate trend may already be overshooting?

In one sense, the conventional explanation of the recent euro-dollar movement is surely right. The main driving force clearly has been monetary divergence, with the Federal Reserve tightening policy and the European Central Bank maintaining rock-bottom interest rates and launching quantitative easing. But how much of this divergence is already priced in? The answer depends on how many people either are unaware of the interest-rate spread or do not believe that it will widen very far.

Last year, many investors questioned the ECB's ability to launch a bond-buying program in the face of German opposition, and many others doubted the Fed's willingness to tighten monetary policy, because doing so could choke off the US economic recovery. That is why the euro was still worth almost $1.40 a year ago – and why I and others expected the euro to fall a long way against the dollar.

But the scope for dollar-bullish or euro-bearish surprises is much narrower today. Does anyone still believe that the US economy is on the brink of recession? Or that the Bundesbank has the power to overrule ECB President Mario Draghi's policy decisions?

With so much of the monetary divergence now discounted, perhaps we should focus more attention on the other factors that could influence currency movements in the months ahead.

On the side of a stronger dollar and weaker euro, there seem to be three possibilities. One is that the Fed could raise interest rates substantially faster than expected. Another is that investors and corporate treasurers could become increasingly confident and aggressive in borrowing euros to convert into dollars and take advantage of higher US rates. Finally, Asian and Middle Eastern central banks or sovereign wealth funds could take advantage of the ECB's bond-purchase program to sell increasing proportions of their German, French, or Italian debt and reinvest the proceeds in higher-yielding US Treasury securities.

These are all plausible scenarios. But at least four factors could push the dollar-euro exchange rate the other way.

First, there is the effect of the strong dollar itself on the US economy and its monetary policy. If the dollar continues to rise, US economic activity and inflation will weaken. In that case, the Fed, instead of raising interest rates faster than expected, will probably become more dovish.

Second, there must be serious doubts about whether Asian and Middle Eastern governments will in fact want to shift more reserves into dollars, especially if this means converting the euros they have acquired since 2003 at a loss and far below their purchasing power parity. Many countries have spent decades diversifying their wealth away from dollars, for both financial and geopolitical reasons. With the US increasingly prone to using its currency as an instrument of diplomacy, even of warfare – a process known in Washington as “weaponizing the dollar" – China, Russia, and Saudi Arabia, for example, may well be reluctant to shift even more of their wealth into US Treasury bonds.

A third factor suggesting that the euro's downward trend against the dollar may not last much longer is the trade imbalance between the US and Europe. The gap is already wide – the International Monetary Fund forecasts a $484 billion deficit this year for the US, versus a $262 billion surplus for the eurozone – and is almost certain to widen much further, owing to the euro's 20% depreciation since the IMF released its estimate last autumn.

The implication is that hundreds of billions of dollars of capital will have to flow annually to the US from Europe just to maintain the present euro-dollar exchange rate. And as the transatlantic trade imbalance widens further, ever larger capital flows will be needed to keep pushing the euro down.

Such huge capital flows are entirely possible, but what will drive them?

That question leads to the final and most important reason for expecting the euro's decline to reverse or at least stabilize. While higher US interest rates will attract some investors, others will move away from the dollar if the combination of a more competitive euro, the ECB's enormous monetary stimulus, and an easing of fiscal pressures in France, Italy, and Spain generates a genuine economic recovery in Europe. The resulting flows of global capital into European shares, property, and direct investment – all of which are now substantially cheaper than corresponding US assets – could easily outweigh the cash and bond investments attracted by rising US interest rates.

What, then, can strike a balance between the opposing forces operating on the euro-dollar exchange rate? No one can say for sure, but one thing is certain: Whereas the profits from playing transatlantic interest-rate differentials may run to 1% or 2% per year, investors can easily lose that amount in a single day – or even an hour – by buying the wrong currency when the trend turns. As we know from decades of Japanese and Swiss experience, selling a low-interest-rate currency simply to chase higher US yields is often a costly mistake.

Bank for International Settlements warns that low rates risk backlash as effects spill over into the real economy

By Szu Ping Chan

11:00AM GMT 18 Mar 2015

The BIS warned that the low rate environment could result in a backlash from ordinary people whose savings were being eroded awayPhoto: AFP

Low inflation, bond yields and interest rates around the world will push the boundaries of economic and political stability to breaking point if they continue on their downward trajectory, the Bank for International Settlements has warned.

The Swiss-based "bank of central banks" said the "sinking trend" of global rates would push countries further into uncharted territory.

It highlighted that $2.4 trillion (£1.6 trillion) of long-term global sovereign debt was now trading at negative yields, with an increasing number of investors willing to pay governments for the privilege of lending to them.

"As bond markets show us day after day, the boundaries of the unthinkable are exceptionally elastic," said Claudio Borio, head of the Monetary and Economic department at the BIS.

"The consequences should be watched closely, as the repercussions are bound to be significant."

The BIS warned that the low rate environment, which has already led to gaping pension deficits and lower bank profits, could risk a backlash from ordinary people whose savings were being eroded away. It said 20 central banks had eased monetary policy over the past three months alone. Mr Borio noted that the low rate environment had become so acute that even the International Monetary Fund had set a floor on its special drawing rights - which serves as the IMF's own form of international currency. Mapped: How central banks lost control of the world

"In such a world, easing begets easing," he said. "If this unprecedented journey continues, technical, economic, legal and even political boundaries may well be tested." Banks have been reluctant to pass on negative rates to retail depositors for fear of losing customers - even though it hurts their profit. JP Morgan said in February that it would start to charge large institutional clients to park their money at the bank. While low UK inflation, which stood at just 0.3pc in January, is expected to be temporary, Mark Carney, the governor of the Bank of England, said in a recent speech that interest rates could stay at a record low of 0.5pc for longer if the pound pushed inflation down further. Minouche Shafik, the Bank's deputy governor for banking and markets, outlined the risks of moving rates into negative territory in its most recent Inflation Report, and said that policymakers were watching developments in other countries closely. She said there was a risk that people and businesses could "revert to cash. [There is] also the worry about what happens to money markets when rates are negative," she said. Martin Weale, an external member of the Bank's Monetary Policy Committee that sets interest rates, said the bank contemplated using negative rates at the height of the eurozone debt crisis but decided against such a move because it would have signalled "a change in the nature of money as we know it". He said companies may have decided to hold money in secure warehouses instead of at the Bank if rates had been cut to below zero. However, Mr Carney has said capital rebuilding by banks has since reduced some of the risks associated with negative rates. A separate paper co-authored by Mr Borio argued that periods of deflation has less economic costs than sustained falls in property prices. Its analysis of 38 economies over a period of more than 100 years showed economies grew by an average of 3.2pc during deflationary periods, compared with 2.7pc when prices were rising. It said drawing blind comparisons with the 1930s were misguided. "The historical evidence suggests that the Great Depression was the exception rather than the rule," said Hyun Shin, head of research at the BIS.

The decision by the Abbott government to sign on for negotiations to join China’s regional bank, foreshadowed by Tony Abbott at the weekend, represents another defeat for Barack Obama’s diplomacy in Asia.The Abbott government is right to make this decision. It had well-founded concerns about the vague and unsatisfactory governance arrangements of the institution when Beijing first invited Canberra to join.Those arrangements have ­improved since then and Australia is only signing on to negotiate terms of accession.If the terms are no good, Australia will ultimately walk away.Canberra’s move follows similar decisions by Britain, Singapore, India and New Zealand.Make no mistake — all this represents a colossal defeat for the Obama administration’s incompetent, distracted, ham-fisted dip­lomacy in Asia.

The Obama administration didn’t want Australia to sign up for the China-led AIIB. The Abbott government rightly feels that it owes Obama nothing.

Obama went out of his way to embarrass the Prime Minister politically on climate change with a rogue speech at the G20 summit in Brisbane.The speech had been billed as dealing with American leadership in Asia and instead was full of ­material designed to embarrass Abbott.Since then, the Abbott government has felt absolutely zero subjective good will for Obama.This is an outlook shared by many American allies.It’s important to get all the distinctions right here.The Abbott government operates foreign policy in Australia’s national interest.That includes full fidelity to the American ­alliance and to supporting US strategic leadership.But the Obama administration has neither the continuous presence, nor the tactical wherewithal nor the store of goodwill or personal relationships to carry Canberra, or other allies, on non-essential matters.

The Obama administration has tried to convince both its friends and ­allies not to join the China Bank.

This was probably a bad call in itself, but, as so often with the Obama administration, it was a bad call badly implemented.The characteristically bad implementation has helped shred Obama’s diplomatic credibility.The Chinese have been the US’s best friends in Asia, diplomatically. Their territorial aggressiveness in the East and South China Seas has driven Asia to embrace America’s security role more tightly than ever.The American military are now the best American diplomats in Asia by far.Such prestige as the US enjoys in Asia these days rests disproportionately on the shoulders of the US military.Obama has neglected and mistreated allies and as a result Washington has much less influence than previously.The saga of the China Bank is almost a textbook case of the failure of Obama’s foreign policy.

* * *

As we have detailed recently, Australia is in trouble economically and its pivot to China makes perfect self-preservation sense... as Sheridan notes:

Obama treats allies shabbily and as a result he loses influence with them and then seems perpetually surprised at this outcome.The Asian professionals in Washington regard the Obama administration as particularly ineffective in Asia.The consensus is that the Obama White House is insular, isolated, inward-looking, focused on the President’s personal image and ineffective in foreign policy.

Britain and Australia might be too polite to tell the US straight up– “Look, you have $18.1 trillion in official debt, you have $42 trillion in unfunded liabilities, and you’re kind of a dick. I’m dumping you.”So instead they’re going with the “it’s not you, it’s me” approach.But to anyone paying attention, it’s pretty obvious where this trend is going.It won’t be long before other western nations jump on the anti-dollar bandwagon with action and not just words.

* * *Bottom line: this isn’t theory or conjecture anymore. Every shred of objective evidence suggests that the dollar’s dominance is coming to an end.

In doing so, it became the 14th central bank to ease monetary policy so far this year, but the first to actually take its "repo rate" below zero to -0.1pc. This means Sweden is actually charging its banks to lend money. In Britain, the same interest rate currently stands at a historic low of 0.5pc, but could well be cut further if Mark Carney is to be believed.

Switzerland and Denmark have already sent their deposit rates to -0.75pc to prevent currency appreciation and defeat deflation. The map above shows how this extraordinary central bank action has become the new normal in the developed world. Faced with the twins threats of deflation and economic stagnation, monetary policymakers are reaching for their interest rate levers and digital money-printing tools in a bid to stave off recessions and debt deflationary dynamics. In energy exporting nations such as Russia, the collapse in oil prices has led to a flight of capital forcing central banks into massive foreign exchange intervention and dramatic rate hikes to prop up the value of their currencies. Loose monetary policy, coupled with the much anticipated tightening from the world's largest economy later this year, is provoking fears that central banks are losing their grip on the global economy. Here's a breakdown of the consequences that could emerge from their actions. Beggar thy neighbour is back"Competitive easing" among central banks has stoked fears of a return of international currency wars. The announcement of unprecedented monetary stimulus from the ECB and the Bank of Japan has led to the respective weakening of their exchange rates and prompted dramatic responses from the smaller central bank players. In Europe, the Swiss, Danish and Swedish authorities have all moved to impose punitive negative interest rates in a bid to prevent their currencies from rocketing in value. The Swiss kicked off this round of devaluation with a shock decision to abandon its de facto peg with the euro in January. The Riksbank has gone further and will begin its own round of bond-buying in response to the ECB's moves. Denmark meanwhile, has been forced to lower rates four times in three weeks and purchase €32bn in foreign exchange to prevent the krone from developing into a safe haven for investors. This co-ordinated central bank action is reviving the "ghosts of the 1930s", according to investment bank Morgan Stanley. In the inter-war period, European economies that left the Gold Standard saw their new fiat currencies weaken, provoking a domino effect of devaluation across the Continent.

Britain was the first major world economy to abandon gold and begin reflating its economy after 1931 (Source: Morgan Stanley)In the end, the moves had a stimulatory effect in Europe's war-torn nations; but in the short-term they succeeded only in exporting deflation to neighbouring countries. Why divergence is so dangerous Looser monetary policy is not the order of the day everywhere in the world (see map above), and herein lies potential danger for the world economy. The expectation of a normalisation of monetary policy by the Federal Reserve has resulted a sustained rally in the US dollar. Such strength in the world's reserve currency has simultaneously applied pressure on economies pegged to the greenback. Meanwhile rate hikes from the Fed - which are expected to begin later this year - will naturally leader to tighter monetary conditions in economies everywhere from Mexico to Hong Kong. It is this divergence in the actions of the world's major central banks which could lead to a new global liquidity crisis, according to the governor of the Bank of England. These fears have also led to the likes of former US Treasury Secretary Larry Summers to warn the Fed to hold off rate rises until they can see "the whites of inflation's eyes." Despite robust job creation and economic output in the domestic economy of the US, the trend towards lower global interest rates will probably slow the extent of the Fed's rate hikes once it finally gets off zero, according to Kit Juckes at Société Générale."The best we can hope now is that the dollar’s advance is orderly and the impact on global capital flows is limited" said Mr Juckes.

As the saying goes, “to err is human, to forgive is divine,” to which I’d add: “to ignore” is even more human, and the results rarely divine. None of us would be human if we didn’t occasionally get so wedded to our wishes that we failed to notice — or outright ignored — the facts on the ground that make a laughingstock of our hopes. Only when the gap gets too wide to ignore does policy change.

This is where a lot of U.S. policy is heading these days in the Middle East. Mind the gaps — on Iran, Israel and Iraq. We’re talking about our choices in these countries with words that strike me as about 10 years out of date. Alas, we are not dealing anymore with your grandfather’s Israel, your father’s Iran or the Iraq your son or daughter went off to liberate.

Let’s start with Israel. Prime Minister Benjamin Netanyahu and his Likud Party pretty well trounced the Labor Party leader, Isaac Herzog, in the race to form Israel’s next government. Netanyahu clearly made an impressive 11th-hour surge since the pre-election polls of last week. It is hard to know what is more depressing: that Netanyahu went for the gutter in the last few days in order to salvage his campaign — renouncing his own commitment to a two-state solution with the Palestinians and race-baiting Israeli Jews to get out and vote because, he said, too many Israeli Arabs were going to the polls — or the fact that this seemed to work.

To be sure, Netanyahu could reverse himself tomorrow. As the Yediot Ahronot columnist Nahum Barnea wrote: Netanyahu’s promises are like something “written on ice on a very hot day.” But the fact is a good half of Israel identifies with the paranoid, everyone-is-against-us, and religious-nationalist tropes Netanyahu deployed in this campaign. That, along with the fact that some 350,000 settlers are now living in the West Bank, makes it hard to see how a viable two-state solution is possible anymore no matter who would have won.

It would be wrong, though, to put all of this on Netanyahu. The insane, worthless Gaza war that Hamas initiated last summer that brought rockets to the edge of Israel’s main international airport and the Palestinians’ spurning of two-state offers of previous Israeli prime ministers (Ehud Barak and Ehud Olmert) built Netanyahu’s base as much as he did.

On Iran, there’s an assumption among critics of President Obama’s approach to negotiating limits on Iran’s nuclear program that if Obama were ready to impose more sanctions then the Iranians would fold. It’s not only the history of the last 20 years that mocks that notion. It is a more simple fact: In the brutal Middle East, the only thing that gets anyone’s attention is the threat of regime-toppling force. Obama has no such leverage on Iran.

It was used up in Afghanistan and Iraq, wars that have left our military and country so exhausted that former Defense Secretary Robert Gates said that any future defense secretary who advises the president to again send a big U.S. land army into the Middle East “should have his head examined.”

Had those wars succeeded, the public today might feel differently. But they didn’t. Geopolitics is all about leverage, and we are negotiating with Iran without the leverage of a credible threat of force.

The ayatollahs know it. Under those circumstances, I am sure the Obama team will try to get the best deal it can. But a really good deal isn’t on the menu.

Have I ruined your morning yet? No? Give me a couple more paragraphs.

O.K., so we learn to live with Iran on the edge of a bomb, but shouldn’t we at least bomb the Islamic State to smithereens and help destroy this head-chopping menace? Now I despise ISIS as much as anyone, but let me just toss out a different question: Should we be arming ISIS? Or let me ask that differently: Why are we, for the third time since 9/11, fighting a war on behalf of Iran?

In 2002, we destroyed Iran’s main Sunni foe in Afghanistan (the Taliban regime). In 2003, we destroyed Iran’s main Sunni foe in the Arab world (Saddam Hussein). But because we failed to erect a self-sustaining pluralistic order, which could have been a durable counterbalance to Iran, we created a vacuum in both Iraq and the wider Sunni Arab world. That is why Tehran’s proxies now indirectly dominate four Arab capitals: Beirut, Damascus, Sana and Baghdad.

ISIS, with all its awfulness, emerged as the homegrown Sunni Arab response to this crushing defeat of Sunni Arabism — mixing old pro-Saddam Baathists with medieval Sunni religious fanatics with a collection of ideologues, misfits and adventure-seekers from around the Sunni Muslim world.

Obviously, I abhor ISIS and don’t want to see it spread or take over Iraq. I simply raise this question rhetorically because no one else is: Why is it in our interest to destroy the last Sunni bulwark to a total Iranian takeover of Iraq? Because the Shiite militias now leading the fight against ISIS will rule better? Really?

If it seems as though we have only bad choices in the Middle East today and nothing seems to work, there is a reason: Because past is prologue, and the past has carved so much scar tissue into that landscape that it’s hard to see anything healthy or beautiful growing out of it anytime soon. Sorry to be so grim.

The markets have been very volatile. This has led to many questions and the most frequently asked questions follow...Q. We're hearing a lot about deflation, but how bad is it?A. Currently, it's intensifying. Inflation is declining around the world and it's gone negative (deflation) in the Euro area and most recently in the U.S. (see Chart 1).

The central banks are fighting these forces with quantitative easing (QE) economic stimulus programs and negative interest rates to help boost their economies and get inflation up to at least 2%.At this point, the biggest danger would be a deflationary downward spiral, which is what everyone wants to avoid.

Here's the bottom line...

As interest rates fall, it becomes more attractive to borrow rather than save.So central banks are hoping that banks will lend more money to consumers who will spend, as opposed to just holding the money in their bank reserves. That's primarily why the velocity of money has been falling.The money created via QE programs has been sitting in banks but it needs to get out there and circulate. That's the main reason why inflation has been declining.That will also help turn the deflationary pressures around and get inflation to finally pick up. It's not happening yet, but hopefully it will.Q. What are the chances of another economic crisis?A. Based on the fact that the stock market is still bullish, despite its recent decline, and it tends to lead, the economy should continue to plug along in the months ahead. But the global economic foundation is not healthy.The biggest problem is debt and we believe it's passed the tipping point. That is, it's become a real drag on the global economies.In 2007, for instance, world debt was $142 trillion. In 2014, it had soared to $199. That's a 40% increase in seven years.So nothing has really changed since the last big recession. In fact, it's gotten worse. There has been no deleveraging and debt is much bigger than the world economy can handle.Many feel this will lead to another crisis or a collapse, and it's indeed a possibility. Remember, during the last crisis in 2007-08 the world was taken to the brink.Every major U.S. bank would have failed if the Fed hadn't intervened. And something along these lines could happen again.

Debt is a Deflator

Debt, for instance, is definitely keeping a lid on global growth. In the U.S., average annual economic growth has only been 1.2% over the past eight years. And that's the best it could do after years of QE and super low interest rates.Plus, median wealth for over half of the people has also dropped 40% since the last recession.The rich, however, are getting richer via assets that're rising.So despite the good economic news you keep hearing about, you can see that the underlying economic foundation is on thin ice.Q. How will this affect gold?A. Gold prices fell further, hitting an almost four month low, quickly approaching its November lows. The soaring dollar and expectations of higher U.S. interest rates have pushed gold to the back seat.

GOLD: 2nd in currency rankingLow interest rates are bullish for gold because gold is then not competing with the currencies. And with most major countries dealing with low to negative rates, gold moves up in the currency ranking.And indeed it has. Gold, as the ultimate currency, is only second to the U.S. dollar in terms of major currency strength. But the soaring fast paced dollar rise is now causing turmoil in the currency market.This is now very interesting.It almost seems unreal for investors to think the U.S. will raise rates when the dollar is soaring. It already has the highest rates in the major countries.But anyway, at some point coming up pretty quick, the dollar rise will be stemmed, either by intervention or exhaustion.And when that happens, a dollar decline will give gold a boost. To think that gold did not hit new lows near $1143 already during the dollar rise, shows its underlying, subtle strength.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.